Standing Committee G

[Mr. Joe Benton in the Chair]

Social Security Contributions

(Share Options) Bill

Joe Benton: I remind the Committee that the debate on the programme motion may last up to half an hour.

Stephen Timms: I beg to move,
 That—
 (1) three sittings shall be allotted to the consideration by the Standing Committee of the Social Security Contributions (Share Options) Bill;
 (2) the second sitting shall be held on Tuesday 30th January at half-past Four o'clock and the third sitting shall be held on Thursday 1st February at Nine o'clock;
 (3) proceedings on the Bill shall be concluded at the third sitting (unless concluded earlier).
 I welcome you to the Chair, Mr. Benton. I do not expect our proceedings to last long, given the modest size and character of the Bill, but I am sure that the Committee will agree that the prospect of expeditious completion is enhanced by your chairmanship. 
 I welcome all members of the Committee, which has the feel of a reunion, because some of us have previously debated related topics in Committee and on the Floor of the House. I am particularly pleased to see my hon. Friend the Member for Putney (Mr. Colman), as well as the hon. Members for Arundel and South Downs (Mr. Flight) and for Torridge and West Devon (Mr. Burnett), with their long-standing interest in the taxation of share options. 
 Question put and agreed to.

Clause 1 - Notices relating to share optionsacquired before 19th May 2000

Howard Flight: I beg to move amendment No. 6, in page 1, line 12, leave out `sixty' and insert `ninety-two'.

Joe Benton: With this it will be convenient to take the following amendments: No. 7, in clause 2, page 3, line 26, leave out `sixty' and insert `ninety-two'.
 No. 8, in clause 2, page 3, line 34, leave out `sixty' and insert `ninety-two'. 
 No. 9, in clause 2, page 3, line 45, leave out `sixty' and insert `ninety-two'. 
 No. 32, in clause 2, page 3, line 3, at end insert 
`on the subsequent exercise, assignment or release of that right, or entitled to a repayment as directed by subsection (7) below'.
 No. 33, in clause 2, page 3, line 27, leave out 
`on which this Act is passed' 
and insert 
`of the exercise, assignment or release of that right'.

Howard Flight: I, too, welcome you, Mr. Benton. I am sure that your chairmanship will be businesslike. I also welcome all Committee members.
 I am a director of companies that hold share options, but none to which the Bill explicitly relates. However, I have some knowledge of the territory from personal business involvement, as well as political involvement. 
 This is a relieving Bill, which improves the existing position. It also corrects the fact that many companies have issued options since April 1999 and will not be able to avail themselves of the measures introduced in May 2000 under which corporate liabilities can be transferred to employees. The problem is that many companies issued options during that 13-month period and would have the same cash flow problems in meeting national insurance contribution charges on employees who exercise those options. The purpose of the Bill is to relieve that by making a special NIC charge payable on gains to November 2000. 
 The Bill is overcomplicated for relatively simply issues. It contains drafting errors and invites companies to gamble, because it requires payment now on options that may never be exercised. It could also put companies in the position of committing the offence of market abuse. 
 Amendments Nos. 6 to 9 are straightforward and would move the deadline period for the once-and-for-all election from 60 days to 92 days. The Government recently changed the reporting deadline for unapproved options from 30 days to 92 days to take account of changes in NIC rules for such options, and we are suggesting the same deadline. When an election is made under the Bill, the Inland Revenue must accept it and confirm the sum due. Then there may be some dispute in the case of companies that are not listed but are close to a listing in agreeing a valuation. Finally, the contribution must be paid. A 60-day period is unrealistic. 
 Although the Bill provides extension powers, it would be more sensible to have a manageable period in the first place. In amendments Nos. 32 and 33, we propose a simpler, fairer alternative that would remove the element of forcing companies to gamble on their tax liabilities. The amendments would remove the 60-day deadline and place the liability on the exercise of the options, which is the normal point of all tax liabilities. The arrangements in the Bill not only have a gamble element but could have unfortunate accounting implications. Latent liabilities could be created that might crystallise later. It would be simpler and safer for the special liability to crystallise on the exercise of the options. 
 New clause 4 offers another choice, if we are forced to have liability up front. It would allow the NIC to be repaid in the event of the relevant options lapsing.

John Burnett: It is with great pleasure that I welcome you as Chairman of the Committee, Mr. Benton. I want to speak to the amendments referring to time limits, and draw the Minister's attention to the problem of over-bureaucratisation for small companies. Although the measure is welcome, it is using a sledgehammer to crack a nut.
 I declare an interest, as I am a lawyer, specialising in taxation matters. However, I do not practise now, and have not done so since a year or so after being elected to Parliament. Share options are a complex matter, and small and medium-sized companies will need to take advice from lawyers and accountants. Sometimes 
 businesses are not aware of changes, although the Inland Revenue will say that its internet site has all the information. Sixty days is not long enough for small and medium-sized companies to decide which way to opt, as negotiations and discussions will have to take place. We support amendment No. 6. 
 I shall come to the bureaucracy involved later and I shall ask why an employer cannot elect either to freeze an unexercised option on 7 November 2000, or wait for the exercise, and use entirely normal procedures? I am merely flagging the points that we shall raise later in the debate.

Tony Colman: I, too, welcome you to the Chair, Mr. Benton. I support amendments Nos. 6 to 9. My hon. Friend the Minister has met a range of advisers and specialists in share option schemes in the past three years, and I hope that he will take my advice in the way in which it is meant when I say that there should be an extension from 60 to 92 days. He has been very supportive of widening share ownership as part of the socialising of capitalism, with which I agree.
 There are good practical reasons for extending the period from 60 days to 92 days. There is also a precedent: the raising of the time limit for approved share scheme returns from 30 days to 92 days. However, there are problems in terms of the time it would take for unlisted companies to have their shares valued, and the need for them to decide whether the shares are readily convertible assets. If the shares were not, there would of course be no basis on which to proceed in national insurance terms. 
 There is a further practical note. I have always admired the pragmatism of my hon. Friend the Minister in respect of these matters. The Bill was published on 20 December—just before the Christmas recess, when many companies are winding down. According to various advisers, most companies are not back in running order until mid-January, so only now are they being alerted to the nature of the Bill. For that reason, one might be critical of this three-week gap.

Allan Rogers: The assumption that companies do not get back in the flow until the middle of the month may be correct in respect of those who run them, but it certainly is not the case for the workers in my constituency.

Tony Colman: I accept that that is the reality on the shop floor. I was making the point that the opinion of the City and of business in general—which we as a Government have listened to, as demonstrated in a Bill that they urged us to introduce—is that mid-January is an inconvenient time to alert companies to these changes. Some three weeks have been lost. On that pragmatic basis, and for other cogent reasons that I have given, I urge my hon. Friend the Minister to accept amendments Nos. 6 to 9.

Nick St Aubyn: I expect that I am not the only member of this Committee who is still struggling with his tax return. It was supposed to be submitted by tomorrow, and I want to put on the record my gratitude to the Inland Revenue for extending the deadline until Friday morning. We all know that the annual deadline is coming up, but many still find it difficult to meet. How much harder will it be for small business men, in particular, to meet a deadline on a one-off opportunity, about which, as the hon. Member for Putney said, they learned about only this week, on returning to their boardrooms from the ski slopes? That said, I wish that businesses in Guildford had as leisurely an existence as those in Putney.

Tony Colman: I was certainly not suggesting that business people in Putney have only just returned to work from the ski slopes. I was simply apprising the Committee of the City's view that it is not appropriate to inform business of the nature of the Bill as late as mid-January. I am not suggesting that I approve of that view—I am merely pointing out that, in this instance, a request for an extension from 60 days to 92 days has been made.

Nick St Aubyn: I am sure that the hon. Gentleman's defence of business people's reputation for hard work, for which I can vouch from first-hand experience, will be toasted in wine bars up and down the City.
 In addition to distractions such as Christmas, businesses have had to consider filing company returns. Indeed, the end of January is a very busy period for companies that come up against their 10-month deadline, and in the light of all such pressing matters, many with unapproved share option schemes will have yet to focus on the Bill. In the context of a one-off election, extending the deadline by a mere 32 days would seem a modest proposal. 
 In relation to amendments Nos. 32 and 33, I should point out that the imposition of national insurance contributions on the exercise of such share options creates a hybrid tax—in effect, a supertax on capital gains. The tax should be approached from a capital gains tax angle, not an income tax or income accruing angle. 
 The way in which capital gains are taxed recognises the fact that it is fair to tax them only when they are crystallised. There is no year-end assessment of people's capital gain in paper terms on the value of their shareholdings, followed by a tax demand. That is because the value of shares may go up or down before they bank the money. Similarly, it makes no sense to crystallise a notional gain on share options, because by the time that they are exercised the gain may be significantly less. 
 The concession has been introduced with a view to the impact on the new economy of the previous rules. New economy shares have been especially volatile over the past year. It is appropriate that the matter should be determined at the point of exercise, not at some arbitrary point—even if that is after 92 days rather than 60.

Stephen Timms: It might be helpful if I set out some of the background to the Bill. On 6 April 1999, changes to the taxation of share options were introduced. Before then, although income tax was always payable on the exercise of share options, national insurance was payable at the earlier point, when the options were granted—and then only on the amount of any discount on the grant of the options. On 6 April 1999, the national insurance charge on unapproved share options was aligned with the income tax charge.
 There were two good reasons for that change: first, to continue the Government's policy of aligning more closely the arrangements for income tax and national insurance and, secondly, there was increasing evidence of straightforward tax avoidance initiatives that created artificial share option arrangements to exploit the fact that national insurance was not payable on option gains, whereas it was payable on income. That is the problem with the suggestion by the hon. Member for Guildford (Mr. St. Aubyn) about different treatment for option gains. 
 After the change was introduced, many companies expressed concern about the unpredictability of the employer's national insurance charge, which was leading to accounting difficulties and creating serious uncertainties. The employer's national insurance liability is uncapped and, in that respect, dependent on the company's share price, and there has been a great deal of share price unpredictability in the past few years. 
 Last year, following a period of consultation, measures were introduced to allow employers to ask the employee to bear the employer's national insurance charge on the share option gain. I announced that change to the Committee that considered last year's Finance Bill.

John Burnett: The Minister is a fine mathematician, and I hope that he agrees that the thrust of the change is that it is a tax-raising measure to garner more revenue. If the employer pays the national insurance charge, he will get a deduction on his corporation tax bill. If the employee pays, he will not.

Stephen Timms: That is not the case, because the employee can offset the charge against his or her income tax bill. If anything, there is a slight loss of revenue to the Treasury. However, as the hon. Member for Guildford has already paid tribute to the Inland Revenue's generosity, that will come as no surprise to the Committee. The legislation allows companies to escape the accounting difficulties and uncertainty presented by the national insurance charge while retaining the advantages of the April 1999 change.
 The Committee will be aware that the Government attach a high priority to establishing an environment in which entrepreneurship can flourish and enterprise is open to all. We are working towards the goal of making the United Kingdom the best environment in the world for electronic commerce. I have been heartened by the recognition, revealed also in a couple of independent surveys published last week, that last May's changes have been helpful in securing those objectives. However, they left one point outstanding: the legislation was drafted to cover all options already granted. In practice, employers have rarely been able to negotiate with employees terms that change options that they already hold, so for many companies that granted options before 19 May 2000 the uncertainty has remained. That is the problem addressed by the Bill. 
 We have accepted the strength of the concerns on this point, and the Bill meets them in a simple and practical way. We are giving companies the chance to settle their national insurance liabilities on the gap options--options issued in the gap period between 6 April 1999 and 19 May 2000—in advance of the date when the option is exercised and the gain made by the employee. Companies can calculate the amount of national insurance due by reference to the accrued gain up to 7 November 2000, the day before the pre-Budget report in which the proposals were announced. That caps the national insurance liability at the company's share price on 7 November 2000, so the company no longer needs to make further provision against profits: it will be able to remove the liability from its balance sheet and avoid any national insurance charge from further upwards movement of its share price. The change has been widely welcomed. 
 The Bill will provide the certainty that employers have been calling for, which is an important step forward. I do not accept the point made by the hon. Member for Arundel and South Downs that the Bill encourages market abuse, but no doubt we shall discuss that in a few moments. That certainty will allow employers to quantify the unpredictable national insurance liability that they have faced up to now, and to pay the special contribution during the fixed period, so that they can, once and for all, allay their concerns about the amount of national insurance that must be set aside for share option gains for share options granted between 6 April 1999 and 19 May 2000. 
 We are conscious of the impact of any legislation on business. That is why we have introduced the Bill. Our initial view was that 60 days was adequate, as the announcement was made last November, but I have listened to the concerns expressed by members of the Committee and also to what companies have been saying, and it is clear that an increase in the time limit would be helpful. I accept that an extension to 92 days would be widely welcomed, particularly by foreign companies operating in the UK, as it would give them adequate time to review their national insurance contribution position in relation to the gap options.As my hon. Friend the Member for Putney said, the extension to 92 days would also mirror the time limit now applied to returns for unapproved share option schemes, which was increased in last year's Finance Act from 30 to 92 days to ease the reporting time limits for employers. The hon. Member for Arundel and South Downs made the same point. 
 The change would give employers additional time to make the necessary inquiries. In some cases, they may need to establish whether shares are readily convertible assets, or obtain a valuation from the shares valuation division. 
 In light of those considerations, I am willing to accept amendments Nos. 6 to 9. In addition to extending the deadline to 92 days, the Inland Revenue will advise all companies that have an unapproved share option plan of the measure. Every company affected will know about the measure, if they are in a position to use it. I hope that that will address the concern expressed by the hon. Member for Torridge and West Devon. 
 Amendments Nos. 32 and 33 go so far that they undermine the principle of the Bill, which is that early payment in the 92-day period following Royal Assent is a fair quid pro quo for certainty. Indeed, it is companies that have been asking for certainty: the initial proposal that there should be early payment in return for certainty came from the companies affected. I am aware that one or two companies, having secured their initial request, have asked for more along the lines of amendments Nos. 32 and 33. In other words, they have asked for an end to uncertainty, but without early payment. In my view, that is not a fair and balanced settlement of the difficulty. The Government made a concession concerning the mechanism on 7 November, so it is understandable that some people came back and asked for more.

Peter Kilfoyle: Why is my hon. Friend persuaded that 92 days, which was suggested by the Opposition, is the appropriate amount of time? Why not 75 or 115 days? Is it cynical to assume that there will be wide boys in the City and elsewhere who will use whatever time is available to find ever more inventive ways to avoid paying their fair share to the Exchequer?

Stephen Timms: I can reassure my hon. Friend that the extension from 60 to 92 days will not give wide boys, or anyone else, an opportunity to avoid paying what is due to the Exchequer. The 92-day period mirrors the time limit that we introduced on the returns for unapproved share option schemes. It is a period that is used elsewhere in the tax system, and it strikes a balance between the need for a rapid settlement of liabilities, the helpful certainty that we are providing, and the need for adequate planning and preparation by the companies affected.
 Amendments Nos. 32 and 33 would also increase the administrative costs that businesses face in applying the special contributions proposed in the Bill. Employers would need to keep track of the gains made by options granted between 6 April 1999 and 19 May 2000. Furthermore, employers would need to establish suitable arrangements to ensure that they could pay the special contributions, perhaps over a period of years, that could have been paid within the fixed period, rather than the full national insurance contributions liability that would have been due without the Bill. The measure offers the opportunity for a company to obtain certainty by settling early. That is the balance that we have offered, and it is the right balance. 
 On the basis that I am willing to accept amendments Nos. 6 to 9, I hope that the hon. Member for Arundel and South Downs will not press amendments Nos. 32 and 33, but if he does, I urge the Committee to resist them.

Howard Flight: I thank the Minister for accepting amendments Nos. 6 to 9, because they will make the Bill workable where it would have been chaotic. Although I understand the quid pro quo argument, it is a new and undesirable principle to introduce into the tax system. It amounts to holding a gun to companies' heads and asking them to take a gamble with you're their tax liabilities and pay on everything now, because that will probably cost less than waiting until later.
 Many companies will not know what the future is likely to hold in terms, for example, of how many staff may leave. Furthermore, given what has happened over the past year, the price of high-tech options may be under water for ever. Finally, the members of pension funds that own shares in those companies would not welcome their pension moneys being gambled with, which is what the measure amounts to. However, we shall obviously not win amendments Nos. 32 and 33—

Nick St Aubyn: I would like to add a few words to my hon. Friend's comments on amendments Nos. 32 and 33. He should reserve until later the decision whether to withdraw them. If he withdraws them now, will my comments be out of order? If—

Joe Benton: Order. The amendments cannot be dealt with now. We are dealing with amendment No. 6.

Howard Flight: I was in the middle of saying that we are unlikely to win a Division on amendments Nos. 32 and 33. Nevertheless, the principles that tax liabilities should be payable when they arise, and that there should not be an element of gambling in the tax system, are, in our view, correct.
 Last May's measures had the net effect of putting a 47.3 per cent. tax charge on employees' unapproved options. The thinking behind that assumed that option remuneration is the same as pay, when in fact it is entirely different. If a talented person, working for a mature company such as Unilever, is considering working for a new, small, high-tech company, it will be unable to pay him his previous salary, so it will attempt to attract and motivate him with an options package. Whether those options will ever be worth anything is a complete risk. If he works hard and the company succeeds, they could be worth a great deal, but large numbers of new businesses, especially in the high-tech sector, do not succeed. The safe pay packet and perks offered by a mature company are different from the risky options that form part of the package from new businesses. 
 If the Minister talks to the many accounting firms that specialise in employment, they will tell him that a 47.3 per cent tax charge has altered the risk-reward ratio for unapproved options, which will kill their use. New businesses will be forced to increase pay, which they cannot afford. The overall impact will be to discourage entrepreneurial endeavour.

Stephen Timms: The rate of 47.3 per cent. is not dissimilar from the rate in the US, and less than that in a number of European countries. The key point is that the enterprise management incentives that we have provided for address precisely the type of high-risk start-up companies to which the hon. Gentleman has referred. He is right to say that people who leave a secure, well-paid job in a big company to contribute to a start-up company are taking a substantial risk, but that is precisely the situation that the enterprise management incentives address, so the inference that he is drawing is incorrect.

Howard Flight: I recollect that the Red Book provided £20 million to £30 million for the enterprise management incentives scheme. It sounds attractive but, again, out there in the real world there has been little take-up, because of the exclusions and complexities and because a company that succeeds is quickly disqualified if it has grown too large. The issue has not yet been dealt with practically.
 As the Minister is aware, in the United States there are enormously more generous approved option schemes. Staff can have $100,000 each year, as against a total limit of £30,000 here. Even with unapproved schemes in the US, while the tax rate is 39.6 per cent. or more with state taxes, companies can offset the tax that employees pay against their own corporate tax liabilities, so the net combined tax is 10 or 15 per cent., which makes companies much more generous with the volumes of unapproved options that they are willing to issue. The suggestion that our tax regime for share options is now parallel to that of the US is a travesty. The approach in the US is much more generous, particularly with new economy high-tech companies that may not have the profits to offset in the case of the tax rules on unapproved schemes, they generally use approved schemes where they can offer more than enough options to satisfy individuals. 
 I put it to the Minister that, while I do not question his good faith, he must be aware that the venture capital industry is extremely critical of the Government's measures. I have a letter from the chairman appointed by the Government's small business investment taskforce, in which he comments that the current national insurance arrangements are ``punitive'', so even one of the Government's own helpers in their entrepreneurial endeavours accepts that point. 
 I am grateful that the Government have accepted that the 92-day period is practical. It would, however, be theoretically correct for these NIC liabilities, if we are stuck with them, not to arise until exercised.

John Burnett: I welcome the Minister's comments and his acceptance of amendments Nos. 6 to 9. He made a typically thoughtful contribution. It is always a pleasure to debate with him, because he has considerable knowledge in matters of tax law. I shall try to tempt him to go a little further, or at least to address the point to which I alluded earlier: why not give individuals a choice to pay either at the value on 7 November 2000 or at the value on the date of exercising the option? I realise that in most circumstances the payment of tax will be deferred to the date of the exercise of the option, but there would be advantages to the Revenue, which would save on bureaucracy; there would be no time limits; there would be flexibility; the small and medium-sized business sectors would be saved considerable effort, problems and fees; and it would be simpler. I do not know whether the Revenue is concerned that such a change would encourage tax avoidance. If so, I would welcome the Minister's comments on that point. It is fairer to the taxpayer to pay at exercise because the value could be lower and the tax less.
 The Bill is welcome, as it ends uncertainty. I welcome the Minister's acceptance of amendments Nos. 6 to 9, especially because it may help the smaller business and the smaller company to avoid some of the bureaucracy that this small Bill will create.

Nick St Aubyn: I, too, thank the Minister for going some way towards responding to our pleas. Certainly, an extra period for people to make a decision is helpful. However, since the announcement in November of the concession behind the Bill, the outlook has changed: there has been a change in the world economy, particularly in the United States. There are reports this week of a crisis of confidence in the US economy: there have been dramatic cuts in US interests rates and there may be more to come this week and thereafter to try to revive confidence.
 In those circumstances, particularly as the loss of confidence relates to uncertainty about the future of the new economy and the new economy companies, many of which will be the sort that the Minister described—overseas companies that have come to this country and granted the options to attract employees—it seems a little harsh that they should pay now for the certainty that he tantalisingly offers them in respect of their tax liability. He appears to be saying that they can have the certainty if they are prepared to pay for it, but it is the companies that cannot afford to pay for the certainty now that most need it to get through the coming year or so. The Government are offering certainty to those for whom it matters least. 
 I am sure that the Minister, who has a great deal of expertise in this area, knows that if the Government were really concerned about the new economy, they would extend a helping hand not only to those who can easily produce the cash in a few months' time but to those for whom every single penny counts, as they try to realise the potential of their business. At a time when the capital markets have dried up for them and they face a great deal of uncertainty in their business world, the last thing they want is continuing uncertainty in their tax affairs, but because of the nature of the deal on offer, that may be the only choice open to them.

Stephen Timms: The hon. Member for Arundel and South Downs suggested that enterprise management incentives had not been widely taken up. More than 100 companies have already taken them up, and the number is rising rapidly. As he will know, we are currently consulting on changes to make the arrangements more generous, and we will announce the outcome at the time of the Budget. That is proving an effective device for targeting the kind of companies about which he expressed concern.
 I also draw the hon. Gentleman's attention to the Arthur Andersen survey, carried out for the Brussels-based GrowthPlus organisation, which exists to promote entrepreneurship throughout the European Union. Arthur Andersen undertook research on nine European countries and the USA to examine the conditions for the companies that it supports in each of those countries. The survey included not only an assessment of the treatment of share options, but all the other influencing factors. Its conclusion, published last week, was that the United Kingdom was the best country of all those examined in which to establish and grow an entrepreneurial business. That is a pretty fair assessment of the current position. The hon. Gentleman should reflect on its conclusions in forming a view. 
 I do not believe that it would be appropriate to accept amendments Nos. 32 and 33. Let me remind the Committee of the background. When the options were issued by the companies, the law was clear: there was no ambiguity about the national insurance position. We are now offering companies the ability—another avenue, if they wish to take it—to settle those liabilities early and obtain the benefit of certainty, but with the clear quid pro quo of early payment. That is a fair settlement. The Committee should bear it in mind that several companies did not award options during the period in question because they understood perfectly well the difficulties that they might encounter in doing so. 
 The proposal is a fair one. The hon. Member for Arundel and South Downs said that he would not insist on amendments Nos. 32 and 33, but if he changes his mind, I urge the Committee to resist them.

John Burnett: The Minister's observation that companies have refrained from granting options is doubtless correct in respect of the large company sector, but my particular concern is the smaller company sector, in which advisers are perhaps not as shrewd and far-sighted, and where the opposite might therefore be true.

Stephen Timms: I can reassure the hon. Gentleman that small companies are also considering the opportunities that the measure will provide, and I do not expect them to hold back from taking such advantage. Many will find it very attractive, because their accounts already provide for the sum relating to national insurance obligations.

John Burnett: The Minister's argument about companies holding back from granting options might be true in respect of larger companies with advisers of great expertise and foresight, but given the period allowed, smaller companies could rush matters and thereby prove vulnerable to associated problems.

Stephen Timms: I do not think that that is right. I know a number of large companies that issued options in the period in question, so the distinction that the hon. Gentleman draws between small and large companies is not correct.

Bill Etherington: A couple of questions passed through my mind during this debate. Companies in Britain pay less tax than those in any other EU country, and, as I understand it, their liabilities are to be passed to their employees. Does my hon. Friend agree that it is clear that whatever is offered is never enough? We never hear those companies saying that the Government have given them too much and should take some of it back. Has anyone consulted the employees? We hear a lot about employers, but has research been carried out on the opinions of those who, in certain cases, will be paying? Many of my constituents would say that, if anything, the Government are being overly generous.

Stephen Timms: My hon. Friend is absolutely right: the survey to which I referred concluded that the UK is the best place in which to set up and develop a small business, and the tax environment forms an important part of the necessary background. We have received representations from some employees who will be affected by the provision. Of course, in small firms there is often a close coincidence between the company's interests and those of the employee. Many employees have willingly signed up to the scheme that enables them to take on an employer's national insurance liability for share options gains, because they stand to gain substantially on exercising those options.

Howard Flight: Given that only 100 companies have taken up the EMI scheme, from a target of several thousand—if not more than 100,000—the success ratio is well below 1 per cent. I urge the Minister to consult fully the relevant accounting firms, so that take-up can be rendered more effective. Moreover, it is no surprise that the regime in this country is more attractive for new business than the regimes in continental Europe, which involve employment taxes and generally higher tax rates.
 The United States has been far more successful than this country—in terms of the proportion of the economy involved and the proportion of investment measured against population weighting—in creating new businesses through venture capital investment. In February, Gouldens, a law firm that specialises in such matters, will publish a report in which its senior partner powerfully argues that the key difference between the United States and ourselves in this respect is the considerably more generous option arrangements that pertain in the former. Moreover, people in the United States are not taxed on approved options until they sell. If they join a business, work with it and get their options and shares, they can continue to own part of the business. In this country, one is virtually forced to sell in order to pay the tax, because the tax liabilities crystallise on exercise. 
 We still believe that it is wrong in principle that the NIC liability should not crystallise on exercise. However, we did not expect to be able to persuade the Government of that, given that they are apparently keen to encourage pension funds to gamble with our pension money in respect of whether companies should have such quid pro quo arrangements, so we shall not press amendments Nos. 32 and 33 to a vote. 
 Amendment agreed to.

Howard Flight: I beg to move amendment No. 1, in page 1, line 13, leave out `is passed' and insert `comes into force'.

Joe Benton: With this it will be convenient to discuss the following amendments: No. 2, in clause 2, page 3, line 27, leave out `is passed' and insert `comes into force'.
 No. 3, in clause 2, page 4, line 6, leave out `passing' and insert `coming into force'. 
 No. 4, in clause 3, page 6, line 3, leave out `passing' and insert `coming into force'. 
 No. 5, in clause 6, page 7, line 39, at end add— 
 `(3) This Act shall come into force on the day appointed in regulations made by the Inland Revenue pursuant to subsection (5) of section 1 above.'.

Howard Flight: The amendments essentially cover the same point about 60 days, but they include a slightly more subtle aspect. As the Bill is drafted, the arrangements will come into force immediately on Royal Assent. However, further regulations will clearly be required in order to determine how the detailed arrangements will be implemented. The Minister assured me that they will be published in the near future, but no draft regulations are yet available. It is not practical to ask companies to operate a scheme without knowledge of their contents.
 The Inland Revenue takes about 10 days to process applications that are made under the measure that was introduced last May to pass NIC liabilities on to employees. The volume of people making such applications is still extremely low, but once the Bill is enacted there will be a flood of applications. Not only should there be a reasonable time period, but it should start when the regulations come into force to ensure that there is not a mess-up if they are not available in time.

John Burnett: Presumably, the regulations will be extremely lengthy and detailed, and I hope that the Minister will confirm that they will be subject to widespread consultation. I support the hon. Gentleman's point: as the regulations will have an important impact on the working of the Bill, people should know the details before it comes into force.

Stephen Timms: The amendments would simply introduce the possibility of a delay into what I think the whole Committee has accepted as a helpful and necessary measure that gives companies additional flexibility and freedom.
 The hon. Member for Torridge and West Devon will be pleased to know that the regulations will not be complex. They will set out the precise nature of the notification required from employers who wish to take advantage of the Bill. It is a straightforward measure, and the regulations can be produced quickly. 
 I want to clear up one misunderstanding that might also crop up later. The hon. Member for Arundel and South Downs referred to a flood of applications. We are talking here about notifications. Companies will be required to inform the Inland Revenue of what they are doing: there will not be an application process in which the Inland Revenue has to say yes or no. It is simply a question of notification. 
 I can understand the concern that the regulations may be delayed. We plan to lay them on the day that the Bill receives Royal Assent. I assure hon. Members that notification will be straightforward and that there will be no delay in laying the regulations. Given that reassurance, I hope that the hon. Gentleman will withdraw the amendment.

Howard Flight: There is in effect an application—I should have used the word ``notification''—for the category of company that is not listed, but does not qualify as a not readily realisable asset, because it may be close to a listing, and the Revenue must agree a valuation with it under the Bill. Such a company is likely to be time-consuming to the Revenue unless the Government accept our later amendments to address the problem.
 Clearly, it is on trust that the regulations will be laid at the time of Royal Assent. I simply ask the Minister what his plans are in the event that, for reasons beyond his control, that does not happen. The wording ``coming into force'' still seems to us to make more sense. It is not a huge issue of principle on which to divide the Committee, but a practical problem with which the Government will have to live. The amendments do not make major points, but they would avoid the danger of the regulations not being available in good time.

Stephen Timms: I am entirely confident that the regulations will be available on time, so I do not have a plan B if they are not.

Howard Flight: On the basis of that assurance, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 11, in page 2, line 15, after `election', insert
`, to the extent of that election'.
 The Chairman: With this we may take amendment No. 12, in page 2, line 17, after `force', insert 
`, or to the extent not covered by any such election'.

Howard Flight: The amendments are designed to cure what we think is a mechanical defect in the Bill. Under the set of national insurance charge changes introduced last May, which enabled employers to agree with employees to pay the employer's national insurance charges, the legal liability for part rather than all of the NIC charge payable by the employer could be agreed to be charged on exercise. Where that occurs, the Bill requires the employee and the employer to make an election to pay the NIC in advance. That is likely to be inconvenient in practice and it would make more sense to allow employers to advance-pay their residual liability for the options and leave it to employees to advance-pay their own liability. It would be unfortunate for delay or refusal by either side to prevent the other from taking advantage of the Bill. In essence, this should not be a joint approach: each side should be free to make its own election.

Stephen Timms: I do not think that the amendments are necessary. The hon. Gentleman makes an interesting point, but from an analysis of the number of share option national insurance elections that have been received by the Inland Revenue, it appears that only a small proportion have asked the employee to meet a part of the secondary contributions due from share option gains, rather than the full liability. The overwhelming majority have been for the full liability.
 There are not, in any case, many share option elections for options granted before 19 May 2000, in the gap period. That is why the Bill is necessary: because for so many of the options, no election has been made. It would not surprise me if there were no cases at all in which there has been a partial switch of liability for options issued in the period 16 April 1999 to 19 May 2000, although there may be a few. 
 If the amendment were made, further amendments would be required to ensure that the roll-over provisions and the assessment of the special contribution could apply to options only partly settled. Those amendments would considerably increase the complexity of the way in which the special contribution has to be calculated. That could leave some options partly settled and would increase administration. 
 Where there has been no election, but the employer has entered into an agreement with the employee, the paying of the special contribution remains in its entirety with the employer. That is the most sensible way to proceed. The amendment is not helpful in a practical way and would introduce considerable extra complexity, and I hope that the hon. Gentleman will not press it to a vote.

Howard Flight: I confess that when I first read the Bill, I thought that there was an error in the wording providing for the special NIC liability to be paid at all by employees. As I commented, I subsequently checked that the arrangements were included in the May 2000 changes. While the Minister is correct when he says that it is highly unlikely that any companies and employees will avail themselves of those measures in the time period—indeed, employers will lack the leverage to persuade employees to bear part of their NIC liabilities in relation to options granted before last May—if even one or two were to do so, there would be a legal problem. The arrangements from May 2000 mean that it cannot be a joint application. Legally, there must be separate applications.
 I accept the Minister's common-sense response, but the Government will need to find another measure if they do not like those provided by the amendments, to address the problem, should it arise. It is not satisfactory to have legislation on the statute books that does not cater for certain foreseeable situations. Even if, in practice, such cases are unlikely, what happens when they arise? I bounce that question back to the Minister. He is probably right, but what do the Government propose to do if there is a partial liability split between employer and employee?

Stephen Timms: The most sensible way to handle such a situation might be for the employer and employee to agree that one or the other--probably the employee--should bear the full liability, and the other provisions of the Bill would then apply. That would resolve the problem satisfactorily, but it is highly unlikely that it would arise.

Howard Flight: My diagnosis is that, without a change, no company will be able to avail itself of the May 2000 arrangements in respect of options during the 13-month period, because it will not be able to meet the requirement for joint election when it would need to be separate. My message is that company advisers will suggest that, if companies want to avail themselves of the measures in the Bill, the liability will need to be all on the employer's side. That is reasonable, but it is the net effect, so it will negate those provisions that otherwise prescribe for partial election. That is how the issue will have to be interpreted.

Stephen Timms: The hon. Gentleman is right, but the employer, not the employee, would probably take on the full liability and then settle it in the way set out in the Bill.

Howard Flight: We have raised the problem, and its legal effect has been described, but we do not want to press the matter to a vote. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Stephen Timms: I beg to move amendment No. 34, in page 2, line 35, at end insert—
 `(6) For the purposes of this Act where, in the case of any right to acquire shares, the person entitled or (if there is more than one) each of the persons entitled to give a notice under this section in respect of that right is a person whose liability by virtue of the giving of such a notice to pay a special contribution under section 2 in respect of that right would be nil, that person or, as the case may be, each of those persons acting jointly shall be deemed—
(a) to have given such a notice in respect of that right in accordance with this section and immediately before the end of the period specified in subsection (1)(c);
(b) to have accompanied that notice with a notification to the Inland Revenue that the liability arising by virtue of that notice was nil; and
(c) to have given that notification in the belief that the facts reasonably ascertainable by him at the time at which he is deemed to have given it were grounds for giving it.'.

Joe Benton: With this it will be convenient to take the following: New clause 1—No liability to Class 1 contributions—
 `(1) Notwithstanding any other enactment, no liability to Class 1 contributions under the Contributions and Benefits Act shall lie in respect of the exercise of any relevant right, or any right to acquire shares granted or acquired in consideration of the assignment or release of a relevant right.
 (2) In subsection (1) above a ``relevant right'' is a right to acquire shares in a body corporate, whether or not granted or acquired in consideration of the assignment or release of any other such right,
(a) which was granted or acquired after 5th April 1999;
(b) which was granted or acquired before 20th May 2000;
(c) which, on 7th November 2000, was not a readily convertible asset nor a right to acquire shares which were readily convertible assets.
 (3) In this section ``readily convertible assets'' has the meaning given it in section 203F of the Income and Corporation Taxes Act 1988.'.
 New clause 2--Automatic rights: notice under section 1 and payment under section 2-- 
 `(1) The appropriate notice under section 1 and the payment of the special contribution under section 2 shall be deemed to have occurred in respect of any automatic right on the coming into force of this Act. 
 (2) In subsection (1) above an ``automatic right'' is a right to acquire shares in a body corporate obtained after 5th April 1999 and before 20th May 2000 where, on 7th November 2000, the amount payable to acquire the shares which are the subject of that right was not manifestly less than the market value of those shares. 
 (3) In this section ``market value'' has the meaning given it in Part VIII of the Taxation of Chargeable Gains Act 1992.'.

Stephen Timms: The amendment addresses the issue raised in new clauses 1 and 2, and I hope that the Committee will accept it.
 We all want to reduce the burdens on employers. The Bill requires all employers who want to take advantage of the new provision to notify their intention to do so within a fixed period. That includes companies for which the special contribution would be nil either because the shares were not readily convertible assets on 7 November 2000 or because the option was under water on that date--that is, the value of the shares was less than when the option was issued. In both circumstances, there would be no liability when the special contribution is calculated. 
 Some companies and their advisers have criticised the provision on the grounds that it amounts to unnecessary bureaucracy and have suggested that it is unfair on small companies, such as those to which the hon. Member for Torridge and West Devon referred, because they might not notice--we shall be writing to all of them--that if they made an application, they would have nothing to pay. The hon. Member for Arundel and South Downs raised the matter on Second Reading and we have listened to the concerns expressed, as I promised then. We want to make the new provision as simple as possible, and the amendment will allow those companies whose special contribution would be nil to be deemed to have notified us. The amendment will also ensure that other provisions continue to apply--for example, the roll-over provision in clause 3 and appeal rights. 
 The amendment will achieve the effect of the new clauses and goes a little further, so I hope that the Committee is able to welcome it and that the hon. Member for Arundel and South Downs will not insist on new clauses 1 and 2.

Howard Flight: I am grateful that the Government have taken this point on board. As the Minister said, the amendment achieves approximately the same end as the new clauses. Given the brief periods of notice involved, this is the area in which the greatest injustice might have arisen, particularly in respect of small companies. Had there been no liability under the Bill, it would have been particularly unjust for failure to understand the requirement, or to act in time, to have crystallised into substantial, on-going liabilities down the line.
 Perhaps the deeming approach will add to the regulations, and I look forward to discovering how the Government propose to operate the clause. Most businesses that the Bill deals with have had a rough time in the past 13 months—particularly new, small, high-tech and new economy businesses—so it is likely that the overwhelming majority will fall into the category covered by the amendment. They will be excluded either because their assets are not yet realisable or because their share price in relation to the price at which options were granted is substantially under water. This is a practical relieving measure that will avoid unfairness for the very businesses that are most in need of help.

John Burnett: We support this helpful provision. It is a useful and sensible solution to what would have proved a problem to those companies whose liabilities were nil. Such companies will now be deemed to have notified, so they will not be adversely affected.
 Amendment agreed to. 
 Clause 1, as amended, ordered to stand part of the Bill.

Clause 2 - Effect of notice under s. 1

Howard Flight: I beg to move amendment No. 21, in page 3, line 6, after `(a)', add `not manifestly less than'.
 The amendment is designed to deal with a technical point rather than a point of principle. The liability on share options is defined in section 135 of the Income and Corporation Taxes Act 1988 by reference to the gain reasonably expected to be made. Other taxation provisions—the approved options in section 9 to the 1988 Act—refer to an amount not manifestly less than market value. However, the Bill implies a need for pinpoint accuracy that exceeds the normal requirement in exercising an option on national insurance contribution liability, especially in respect of unlisted companies. In that regard, the amendment is designed to put the Bill in line with other relevant tax statutes.

Stephen Timms: I believe that I can reassure the hon. Gentleman that the Bill does not require employers to observe a level of accuracy that is not demanded elsewhere in tax or social security legislation. In respect of share options gains, the method of calculating the special contribution is the same as for any secondary class 1 contributions. As drafted, the clause specifies that the special contribution is calculated in the same way as a class 1 contribution that would have been payable
``by virtue of section 4(4)(a) of the Contributions and Benefits Act if the right had been exercised in full on 7th November 2000''. 
That section is then calculated by reference to the taxable gain under section 135 of the Income and Corporation Taxes Act 1988. That deals with the level of accuracy referred to by the amendment, because it considers 
``the amount that a person might reasonably expect to obtain'' 
from the sale of the shares on the open market at the time. The wording is covered—admittedly at two steps removed—by the wording in the 1988 Act. As the point raised by the hon. Member for Arundel and South Downs is covered, the amendment is unnecessary.

Howard Flight: I am very pleased to hear that the point is covered, no matter how obscure it might appear. I accept the Minister's undertaking that the principles and approach of section 135 are covered in the Bill and will not require tighter drafting. He has now clarified the matter on the record, and I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move, amendment No. 22, in page 3, line 20, leave out `amount' and insert `gain'.

Joe Benton: With this it will convenient to take the following amendments: No. 23, in page 3, line 21, leave out from `release' to `by' in line 22.
 No. 24, in page 3, line 22, at end insert— 
`as determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988'.
 No.25, in page 5, line 6, leave out `amount' and insert `gain'. 
 No. 26, in page 5, line 7, leave out from `release' to `by' in line 8. 
 No. 27, in page 5, line 9, at end insert— 
`as determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988'.
 No. 28, in page 5, line 10, leave out `amount' and insert `gain'. 
 No. 29, in page 5, line 11, leave out from `right' to `by' in line 12. 
 No. 30, in page 5, line 13, at end insert— 
`as determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988'.

Howard Flight: These are essentially technical amendments, drafted in response to what we believe to be a weakness in the Bill. The key element in valuing options is the inherent gain in the option—the market value of the underlying shares, less the amount paid for them. The same section 135 of the Income and Corporation Taxes Act 1988 has such a provision. The Bill refers merely to the value of the underlying shares, which could lead to a technical breakdown in what the Government are trying to achieve.
 There is at least one flaw to consider. The intention of clause 2 is to prevent tax avoidance by electing to pay in advance the NIC, followed by a cash payment to buy out the option for a larger amount. As drafted, the Bill makes it easy to avoid that tax, as it seems to have forgotten to deduct the exercise price from the value of the shares. If someone wants to avoid his tax liability, he has only to buy out the option for less than the value of the shares but for more than the inherent profit in the option. The Bill will assist tax avoidance rather than hinder it. 
 The intention of clause 3(5)(b) is to determine whether an option roll-over has been enhanced, by exchanging a more valuable option for a less valuable one, to prevent the advance payment on NIC from being carried over to the new option. The error may have occurred because there was an assumption that the NIC provisions for option roll-overs were dealt with in the 1979 regulations, which are also in somewhat of a mess.

Stephen Timms: I am extremely grateful to the hon. Gentleman for drawing the Committee's attention to an avoidance loophole that exists in the Bill as drafted. Our intention is clear: we want to protect the national insurance liability when an option is exchanged for a consideration that may be of a higher value. We have received representations that clauses 2 and 3, as drafted, could lead to the opportunity to avoid national insurance contributions. The clauses are intended to leave a class 1 liability on the excess value given for a settled option, but national insurance payments could be avoided through manipulation of the exercise price.
 I am happy to accept these helpful amendments in principle, but not as drafted. They would close one loophole but open another, which I know is not the hon. Gentleman's intention. I undertake to introduce a Government amendment on Report, so I hope that he will withdraw the amendment.

Howard Flight: I thank the Minister for his comments. Far be it from me to help to draft such Bills, but I am glad that the Government will address the issue on Report. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 19, in page 3, line 23, after `(5)', insert `and subsection (5A)'.

Joe Benton: With this it will be convenient to take the following amendments: No. 20, in page 3, line 46, at end insert—
 `(5A) Where a person becomes liable to pay to the Inland Revenue a special contribution, subsection (4) shall not apply if the person has paid an amount in respect of the special contribution (such amount being the sum which the person believes on reasonable grounds to be owing by him to the Inland Revenue) but, prior to the expiry of the deadline mentioned in paragraph (b) of subsection (4), the Inland Revenue have neither confirmed nor agreed the amount of special contribution due.'.
 No. 31, in page 3, line 46, at end insert— 
 `(5A) Unless the contrary can be shown, for the purposes of paragraph (c) of subsection (5) above, it shall be assumed that a person employed by a body corporate, or a person who is a body corporate, which is under the control of a body corporate resident outside the United Kingdom has a reasonable excuse.'.

Howard Flight: Amendments Nos. 19 and 20 are important in terms of fairness towards individuals who may be affected by the Bill. If the Revenue has not confirmed the amount due and the special contribution has not been made within the specified period, the election fails and individuals and companies are exposed to the full NIC liabilities. Towards the end of the 92-day notice period, a dispute could arise over share valuation, especially for companies that are not listed but have readily convertible assets and are close to a listing. It would be wrong for taxpayers to be penalised either because of an Inland Revenue delay or because a perfectly bona fide argument was in the process of being thrashed out. It would be much fairer for the law to provide that the election was safe, but if the Revenue were to win the argument that the price was too low, a top-up could be payable subsequently. It would be unreasonable to put the whole election at risk.
 Amendment No. 31 concerns a different issue, which the Minister touched on. In the case of the growing number of foreign-owned companies, especially in the high-tech sector, individuals will frequently have options in the parent company—predominantly in the United States—and they are kept out of the loop of the United Kingdom company. Often the administration of the UK company will not be aware of the option arrangements with the UK-based staff of the parent company. Such companies may not be on the ball in time to respond to the proposed legislation. Amendment No. 31 would give a second wind to companies in that category. 
 The extension from 60 to 92 days will help, but the Minister has already accepted that this is a problem category of companies, because the US parent will have to address the requirements of UK law.

Stephen Timms: We have already accepted an extension to 92 days, so further amendments in that regard are unnecessary. There may also be a misunderstanding about how the Bill deals with notification and payment procedures. The submission of notification and payment of the special contribution do not require prior Inland Revenue approval or confirmation. An employer could not claim that a delay in payment of the contribution was due to delay in such a process.
 The hon. Gentleman makes the point that if a share valuation is required, but the valuations are not agreed in time, companies could be penalised. If the amount paid proves to be wrong, there are appeals provisions in the Bill that will enable the correct amount to be paid after 92 days, provided that the original estimate was reasonably made.

Howard Flight: My legal advice is that, as the drafting stands, even if a reasonable estimate is made, if the Revenue disagrees with it the original national insurance contributions charge applies. Although the Revenue has the discretion to lengthen the 92-day period, the incentive is the wrong way round. The Bill does not protect companies on the issue of valuation.

Stephen Timms: I can reassure the hon. Gentleman on that matter, but allow me do so in a moment.
 The Bill allows employers first to decide whether and to what extent they wish to take advantage of the opportunity to settle the liability, and secondly to calculate and pay the special contribution in the specified period. If an employer notifies and pays the special contribution believing it to be his correct liability, or notifies a nil liability, or fails to do either of those things, the Inland Revenue can extend the specified period. That will be considered in cases where there are reasonable grounds for making an incorrect payment or for notifying a nil payment. The Revenue may also consider extending the period if there is a reasonable excuse for failing to make the payment following notification in the specified period. Those provisions also help to cover the hon. Gentleman's point. 
 In our view, it is not necessary or desirable to make special treatment for cases where the controlling company is resident overseas. Employers should ensure that they have the communications in place to enable them to meet promptly their income tax and national insurance liabilities. It is unjustifiable to give overseas-controlled companies a special regime that would allow them an extended period to meet their liabilities that would not be available to UK-controlled companies. That would be an unfair imposition on UK companies. 
 If, in all the circumstances, there is a reasonable excuse for the failure, including reasons founded on the difficulties of communicating with the parent company, the Revenue can extend the period under the clause as drafted. That is a fair provision applying equally to all companies, and it is of long-standing application in other legislation. 
 The intention behind the amendments is already covered in the Bill. With the benefit of the additional explanation that I have been able to provide and the assurances that I have given, I hope that the hon. Gentleman will withdraw the amendment, and will not press amendments Nos. 20 and 31 to a vote.

Howard Flight: I seem to have failed to communicate the point that I am getting at, especially in relation to amendments Nos. 19 and 20. As the situation stands, if an unlisted business happens to get caught, and it believes that the appropriate valuation should be £1 per share, the Revenue can hold a gun to its head and say that it should be £1.30 per share. Although the Revenue has the powers to lengthen the period, it is has no incentive to do so because its job is to extract tax. It is therefore placed in a position of unjustified and unreasonable power. If one does not follow the Revenue's instructions on the share price, the punishment is that one misses the option and is exposed to the full NIC charges for ever after.
 It would be fairer if the Bill were to provide that if one has made a reasonable estimate, completed the form, got it in on time and paid one's money, that ticks the box in terms of having taken that option, while empowering the Revenue to demand a further contribution in due course if it can substantiate a view that the estimated price of the valuation was too low. At present, the leverage is entirely the other way round.

John Burnett: Presumably, if additional NIC or tax is payable it will attract interest.

Howard Flight: That would normally be the case. The Revenue will not be out of pocket. However, in respect of difficult categories of company it is almost unfair on the Revenue to assume that it will not use the powers that the Bill would otherwise give it to extract as much tax revenue as it can.

Stephen Timms: A company does not have to have an agreed share valuation before it makes its payment. It is required to pay an amount on a reasonable basis within the 92-day period. It does not have to wait for the valuation to be completed before it does so: it can take a reasonable view and pay the money. If the valuation that is subsequently agreed is higher, it is possible for the extra money to be paid outside the 92 days.

Howard Flight: If the Minister is correct, that is exactly what we seek to achieve. My legal advice suggests that if the Revenue does not agree the amount that has been paid in and the value, it invalidates the option and the original NIC charge will apply. Perhaps that is wrong. The Minister's comment appears to clarify the intention of the Bill, and on that basis I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendments made: No. 7, in page 3, line 26, leave out `sixty' and insert `ninety-two'. 
 No. 8, in page 3, line 34, leave out `sixty' and insert `ninety-two'. 
 No. 9, in page 3, line 45, leave out `sixty' and insert `ninety-two',.—[Mr. Flight.] 
 Clause 2, as amended, ordered to stand part of the Bill.

Clause 3 - Special provision for roll-overs

Howard Flight: I beg to move amendment No. 14, in page 4, line 15, leave out from beginning to end of line 15 on page 6 and insert—
 `(1) In this section—
(a) an ``original right'' is a right to acquire shares in a body corporate granted after 5th April 1999 and before 20th May 2000 (and which includes a new right which is subsequently exchanged for a further new right);
(b) a ``new right'' is a right to acquire shares granted or acquired in consideration for the assignment or release of an original right (whether comprising all or part of the consideration for that assignment or release);
(c) a ``parity exchange'' occurs on the grant of a new right where the gain which could reasonably be expected to be made on the exercise of the relevant new right immediately after the grant or acquisition of that right, together with the value of any other consideration given for the assignment or release of the original right, is not manifestly less than the gain which could reasonably be expected to be made from the exercise of the original right immediately prior to the assignment or release of that right;
(d) an ``enhanced exchange'' occurs on the grant or acquisition of a new right where a parity exchange does not occur; and
(e) the gains which might be reasonably expected to be made on the exercise of a right to acquire shares shall be determined by section 135(3)(a) of the Income and Corporation Taxes Act 1988.
 (2) On a parity exchange
(a) any notices made, or deemed to have been made, under this Act in respect of the original right shall be deemed to have been made in respect of the equivalent new right;
(b) any special contribution paid, or deemed to have been paid, under this Act in respect of the original right shall be deemed to have been paid in respect of the equivalent new right; and
(c) the Income and Corporation Taxes Act 1988 shall apply to the new right as they applied to the original right.
 (3) On an enhanced exchange the new right shall be apportioned on a just and equitable basis agreed with the Inland Revenue into two rights, the first of which representing the new right which would have been granted or acquired as the result of a parity exchange (which shall be treated according to subsection (2) above) and the second of which representing the balance of the actual new right (which shall be treated under this Act and the Income and Corporation Taxes Act 1988 as if no notice had been made and no special contributions paid in respect of that right). On any subsequent partial exercise of the new right the second apportioned right shall be treated as having been exercised in priority to the first apportioned right.
 (4) Where a new right is granted or acquired as a result of the change of control of a body corporate then a parity exchange shall be deemed to have occurred if the relative terms of the new right and equivalent original right correspond to the terms offered to the holders of shares in that body corporate (``control'' being construed in accordance with section 840 of the Income and Corporation Taxes Act 1988).
 (5) Where prior to the coming into force of this Act payments have been made in respect of Class 1 contributions due on the exercise of any new right, then on a claim being made by the person who paid them all such repayments of those contributions shall be made, less any amount representing the special contributions which would be due under section 2 above.'.

Joe Benton: With this it will be convenient to discuss amendment No. 15, in page 5, leave out lines 21 to 38 and insert—
 `(7) For the purposes of this section shares in relation to any right (``the new right'') constituting or comprised in the consideration for the assignment or release of another right (``the old right'') are additional shares in the same proportion that any enhanced gain in that right bears to the entire gain in that gain immediately after the grant or acquisition of the new right. 
 (8) For the purposes of subsection (7) above 
 (a) the gain in the new right is the gain that would be chargeable to income tax under section 135 of the Income and Corporation Taxes Act 1988 on an immediate exercise of that right; and 
 (b) an enhanced gain is the amount by which the gain in the new right exceeds the gain that would have been chargeable to income tax under section 135 of the Income and Corporation Taxes Act 1988 on an exercise of the old right immediately prior to its assignment or release.'.
 Clause 3 stand part.

Howard Flight: Without wishing to offend anyone, the drafting of the clause is rather a mess, and it does not make the correct provision for roll-overs. It seems to assume that section 136(1) of the Income and Corporation Taxes Act 1988 is a taxing section, whereas it is an explicitly non-taxing section, and says that an option exchange is not treated as a payment to buy out the original option. The Government apparently want to allow for the advanced NIC payment to be carried over on an exchange of options of equal value but to retain an NIC charge where the new right is more valuable—in other words, where there has been an injection of value.
 That could be done simply, with our amendments addressing a technical issue on post-takeover exchanges, where the roll-over generally occurs on the same terms as the takeover but after control has passed, so that, strictly, all post-takeover exchanges have an enhancement element. As matters stand, that is ignored for approved option exchanges, an approach that should surely be followed here. 
 Amendment No. 15 follows the previous arrangement. If there has already been an NIC payment on new options, surely there cannot be a claim for repayment of any excess. 
 This is a highly technical area. I assume that the Government do not intend that, in roll-overs, special NIC arrangements and wider arrangements should follow a different path from the accepted approach. Those in such a case should not be subject to additional NIC taxation.

Stephen Timms: The clause is inevitably somewhat complex, because we must ensure that there is a level playing field for all kinds of options. To exchange one option for another at parity will create no problems, but we must ensure that the favourable new rules are not misused to escape liability where the exchange is not at parity. Otherwise, there would be nothing to prevent a settled option on one share from being extended for an option on 10,000 shares, with no further national insurance liability. The rules also need to be able to deal with a situation where one option is exchanged for another in the same or a different company, where other assets and cash may form part of the deal and the option is rolled over more than once.
 The Bill must address those complex situations to ensure that, where the exchange is at parity, the settlement is still valid. 
 The amendments reveal what may be technical defects in the wording of the clause, so I give the Committee an undertaking that we will reconsider the clause to ensure that it achieves the necessary result and will make any necessary changes on Report. I hope that, on that basis, the hon. Gentleman will withdraw the amendment.

John Burnett: Is it the thrust of Government policy that, if there is a bona fide exchange of shares on a takeover at approximate parity—provided that it is not part of an overt tax avoidance measure—it should be treated, to use capital gains tax jargon, as no gain, no loss, so no charge comes into play for national insurance contributions?

Stephen Timms: The hon. Gentleman is right. If the roll-over is at parity, there should be no additional charge.

Howard Flight: I thank the Minister for his comments. This is highly technical territory where I cannot claim any particular expertise. The bottom-line concern is that the valuation rules could produce a notional enhancement, even if the unapproved scheme uses a roll-over formula that the Revenue has agreed meets the equivalent test for the purposes of the approved scheme.

John Burnett: We perhaps have an opportunity now to influence the Bill. Does the hon. Gentleman agree that valuation is an art, not a science, so that in any legislation there must be tolerance in valuation? The shares valuation division values might not always coincide with the company's accountant's valuation.

Howard Flight: Indeed, there must be that tolerance. The law generally already provides for that and that is part of the point. Also, subsection (6) specifically seems to exempt only the roll-over and not the subsequent exercise of the roll-over option.
 Without detaining the Committee with technicalities that I do not fully understand, I am grateful to hear from the Minister that the Government will re-examine the wording and no doubt consult the lawyers who specialise in the area so that we can all be happy with it. On that basis, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 3 ordered to stand part of the Bill.

Clause 4 - Consequential changes to tax relief provisions.

Howard Flight: I beg to move amendment No. 16, in clause 4, page 6, line 44, leave out `or (4)'.
 There is a potential drafting error in subsection (3). The words ``or (4)'' seem misconceived. As drafted, the subsection seems to be intended to prevent tax relief for the payment of NIC in a number of areas where the Bill removes the obligation to pay full NIC on option exercise, and the list includes clause 2(4), which in fact does not remove the obligation to pay full NIC but reimposes it. There is a double negative point that will not prevent a liability from arising if the payment is not made within 60 days, or now 92 days.

Stephen Timms: This amendment, too, relates only to options that were granted in the gap period between 6 April 1999 and 19 May 2000 and to cases in which there has been an election to transfer the liability for the class 1 national insurance contributions to the employee. It is based on the assumption that the reference in subsection (3) to clause 2(4) is superfluous because no double deduction would in any case be possible when payment of the special contribution was not made within the 92-day notice period.
 Income tax relief is given in section 187A of the Income and Corporation Taxes Act 1988 when an election has been entered into that transfers a liability for secondary national insurance to the employee. The clause here ensures that relief will be given if that liability is converted to that of a special contribution. If the special contribution is not paid within the 92-day notice period, so that the liability is subsequently extinguished, the wording in subsection (3) that is the subject of the amendment is still required in order to review any possibility of double income tax relief. 
 There would be very few circumstances in which this part of the legislation would take effect, but it is still required to remove any possibility of double income relief. I hope that, on that basis, the hon. Gentleman will withdraw the amendment.

Howard Flight: I thank the Minister for his comments and I agree that the focus is on not getting double taxation relief. Will he re-examine the point before Report stage? Clause 2(4) does not remove the obligation to pay full NIC but actually reimposes it. He may have persuaded me that our concern is not justified, but I should be grateful if he would undertake to re-examine the clause to ensure that my concern is covered. On that basis, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 17, in page 6, line 48, leave out `not'.

Joe Benton: With this we may take amendment No. 18, in page 7, line 2, at end add—
 `(5) Where a person pays a special contribution pursuant to section 4 above then, as the case may be, that payment shall comprise either
(a) a deductible expense wholly and exclusively laid out or expended for the purposes of any trade, profession or vocation carried out by him; or
(b) a deductible expense of management of an investment company (where that person is an investment company); or
(c) an amount expended wholly, exclusively and necessarily in the performance of the duties of any office or employment held by him.'.

Howard Flight: The amendments are alternative suggestions designed to put right what we believe is a lacuna in the drafting of the Bill. The Bill states that tax relief will not be given when the option is exercised, presumably as part of the attempt to prevent double-counting NIC relief, but it does not say when the relief is to be given. To avoid any suspicion that no personal income tax relief is intended, which I am sure is not the Government's intent, these alternative amendments either remove the original provision or allow tax relief at the time of payment, which would probably be the norm under present legislation.

John Burnett: I endorse the hon. Gentleman's points, which to some extent go to the point that I made earlier, when the Minister was able to put on record the exact tax treatment of those contributions.

Stephen Timms: The amendments provide alternative changes to the way in which the clause acts in relation to income tax relief for special contributions paid by employees. I hope that I shall be able to persuade the hon. Member for Arundel and South Downs that they are unnecessary and that income tax relief will continue to be available on special contributions.
 Section 187A of the Income and Corporation Taxes Act 1988 gives relief to an employee in respect of the secondary class 1 national insurance contributions that he has agreed to bear on the share option gain through paragraphs 1(3)(a) or (b) of schedule 1 to the Social Security Contributions and Benefits Act 1992. The relief is given as a deduction against the amount chargeable to income tax on the option gain under section 135 of the 1988 Act. 
 The employer is obliged to operate pay-as-you-earn on the gain on exercise in these cases and, in doing so, is required to take into account the amount of the tax relief under section 187A in calculating the PAYE deduction. The employer can do that in a normal case, because the liability for the secondary class 1 NICs arises at the same time as the requirement for the PAYE deduction on the gain itself. 
 The clause ensures that the employee will still be entitled to an income tax deduction in respect of the special contribution to which he or she becomes liable under the Bill. It does that in subsection (2) by deeming that section 187A has effect in respect of those liabilities. However, subsection (4) provides that the PAYE obligation on the employer in respect of the gain on share option exercise need not take account of the income tax relief given under section 187A for the special contribution. That is because the employer may be required to operate PAYE on the gain many years after the special contribution is made. The clause reduces the administrative burden on the employer. The amendment would increase that burden, because employers would have to maintain records of amounts of special contributions paid in one year by each employee and link those to the option gains that might be achieved at some time in the future. 
 The clause does not remove the entitlement to tax relief from the employee nor does it affect the amount or the timing of that relief. Income tax relief will still be given against the share option gain through the employee's self-assessment tax return. I hope that the hon. Members for Arundel and South Downs and for Torridge and West Devon will find those remarks reassuring.

Howard Flight: When an employer pays this special NIC, which he will do in the relatively near future, when will his income tax be offset? My lurking concern is that, if the employer pays but the share option is never exercised—either because the employee has left the company or because the option is constantly under water—such an individual might fork out the special NIC payment and receive no income tax deductibility against it, which would be extremely unjust. If the formula relates income tax deductibility to realising a gain on the option, that is exactly what would happen.

Stephen Timms: If an option is never exercised, income tax relief for special contributions paid by an employee will be given in the same way as relief for class 1 contributions where a notice is not made. In other words, it will be given against the option gain at the time that the option is exercised, and relief will be given through self-assessment. If they have employees who are affected, employing companies must, in the time allowed by the Bill, use their best judgment to decide whether to give a notice in relation to special contributions.
 Even when employees have elected to pay class 1 national insurance contributions on the eventual share option gain, their employer can, under the Bill, decide to give a notice. In such a case, the employer will be responsible for paying the crystallised special contributions. We are giving companies and, where applicable, employees a chance to finalise their liability and obtain certainty. Giving notice is not compulsory under the Bill. In deciding whether to take the opportunity, employers need to weigh all relevant factors, including the likelihood of the option lapsing. 
 Relief will be obtained when the option is exercised, and the relevant mechanism is the self-assessment arrangements.

Howard Flight: The position is as I feared, and the Minister must surely accept that it is unfair. If, for whatever reason, the employer is able to lean on the employee so that he stumps up the special NIC payment, and if the employee is subsequently fired and his options lapse, he will have paid NIC that would never have arisen and will have no income tax deductibility. That seems extremely unfair. I do not deny that such a circumstance is rather unlikely, given that it is mainly employers who will operate the provision, but it could arise and the law should provide for it in a fair way.
 On the timing of the income tax deduction, the paying employee could be out of the money for some time. I assume that there is no suggestion that he should get an interest credit. Again, the provision forms part of a quid pro quo that is stacked somewhat in the Revenue's favour. As well as being asked to take a gamble, the paying employee will be out of income tax relief until the option is exercised. I understand the mechanics, but I do not feel that it is a fair arrangement.

Stephen Timms: It is, as the hon. Gentleman has said, part of the quid pro quo—the benefit of certainty in exchange for early payment. I do not understand why he thinks that an employer might lean on an employee to avail himself of this opportunity. As far as we can tell, in the small number of cases when the employee has taken on liability, it would be a matter for the employee to determine. In most cases, it would be a matter for the employer, in which case that concern would not arise.

Howard Flight: I can easily think of situations where, specifically in relation to the Bill, a company might say to an employee, ``Look, you've got these options that were issued before the power existed, as of last May, for us to transfer our liability to you. We will issue you with more options only if you accept liability.'' It is perfectly possible for companies to apply leverage to their employees to transfer the liabilities. In that situation, the employee is treated unfairly if the firm subsequently gets rid of him and he never exercises his options. He will have paid his national insurance contributions, but lost them, and he will have lost his options, but received no income tax offset.
 Question put and negatived. 
 Clause 4 ordered to stand part of the Bill. 
 Clauses 5 and 6 ordered to stand part of the Bill.

New Clause 3 - Indemnity

`.—Notwithstanding any discrimination between the holders of rights to acquire shares introduced by this Act, no right of action against the Crown shall lie under the Human Rights Act 1998 as a result of the coming into force or operation of this Act.'.—[Mr. Flight.] 
Brought up, and read the First time.

Howard Flight: I beg to move, That the clause be read a Second time.
 As the wording suggests, we have noticed that the various references to European legislation that often appear in British legislation have not been included in the Bill. Although there are no obvious human rights issues, is it not standard practice to have a clause such as this in all Bills?

Stephen Timms: No, it is not standard practice to have such a clause, which disapplies the Human Rights Act 1998, in all Bills. It is unclear how this legislation might offend against that Act.

John Burnett: Presumably, such a clause would gainsay the certificate that the Chancellor of the Exchequer gave the Bill in the first instance.

Stephen Timms: The hon. Gentleman has a point.
 There is no compulsion in the Bill. We are offering companies a simple and practical solution to a legitimate concern that they raised with us. A company choosing to settle on its share price on 7 November will obtain certainty, which is perceived by many companies to be an important benefit. To suggest that any part of the legislation is ``discriminatory'' would be to stretch the word beyond its natural meaning. If the Bill did contravene anyone's human rights, which I am confident that it does not, it would be wrong to deny that person any remedy that the 1998 Act may provide. With that in mind, I hope that the hon. Member for Arundel and South Downs will withdraw the motion.

Howard Flight: The question whether the Bill is in contravention of the Human Rights Act 1998 had not been raised, but the Minister has made the position clear on that. Whether the provision is worded as in the amendment or in standard language is another debate. He has said that the Government believe that nothing in the Bill will contravene human rights provisions, so I beg to ask leave to withdraw the motion.
 Motion and clause, by leave, withdrawn.

New Clause 4 - Procedure when right to acquire ceasesto be exercisable

`(1) Where a right to acquire shares has been the subject of a notice under section 1 above and the payment of a special contribution under section 2 above, and that right subsequently ceases to be exercisable to any extent then at the appropriate time an appropriate person may make a claim for the repayment of the appropriate amount.
 (2) The procedure for making a claim under this section shall be governed by regulations made by the Inland Revenue pursuant to section 1(5) above.
 (3) In this section
(a) the ``appropriate amount'' is the amount of the special contribution in question, reduced to take account of any tax relief (if any) given on the original payment of that special contribution, apportioned on a just and equitable basis agreed with the Inland Revenue to the extent that the right has ceased to be exercisable;
(b) the ``appropriate person'' is the person who paid the special contribution in question;
(c) the ``appropriate time'' is the period of twelve months commencing with the end of the year of assessment in which the right in question has ceased to be exercisable to any extent.'.—[Mr. Flight.]
 Brought up, and read the First time.

Howard Flight: I beg to move, That the clause be read a Second time.
 I referred to the new clause when we discussed amendments to clause 1. It is a possible alternative to our first suggestion of a special NIC crystallising on exercise and would provide for repayment of NIC, with a facility for partial repayment if only part of the option lapses because the share is under water or someone has left employment. The Minister said that the Government intend the Bill to provide that quid pro quo, but it is unsatisfactory for companies or employees to pay tax that they do not need to pay and it is not proper to ask people to gamble on an outcome. The Government should consider the new clause as a possible option to cover that.

Stephen Timms: The new clause is contrary to the spirit of the Bill. Our aim is to allow companies to obtain some certainty and, inevitably, a judgment must be made. It is a voluntary measure and employers will have to consider whether settling the NIC at the share price on 7 November 2000 is right for them. They will have to make a judgment on whether the benefits of early settlement outweigh the risk that the share price might fall or that options will not be exercised.
 The Bill gives companies the chance to arrive at a once-and-for-all decision on what is in their best interests. It provides the certainty that they asked for in relation to their liability on gap options. If refunds were allowed, the certainty that companies have asked for would be undermined, and that would undermine the whole purpose of the Bill. The certainty that is provided by the Bill is valuable for companies and the Exchequer, and I hope that the hon. Gentleman will not press the motion to a vote.

Howard Flight: The new clause would not undermine certainty. If companies pay the special NIC, that discharges the future employer's NIC liability. All it does is to provide that if no NIC is payable because the option lapses, the NIC will be paid back. It would not undermine the principle of certainty. It boils down to whether the Committee believes that the quid pro quo gamble on NIC liability is a principle that we want in our tax law. Our view remains that that is undesirable, and that it would be fairer, if NIC liability is not to apply on exercise, to provide that it will be refunded if options are not exercised. The Government have made it clear that they are keen on their quid pro gamble, notwithstanding the concerns of many eminent tax lawyers. I shall not carry the argument further, but perhaps the Minister will think about it a little further in his bath ahead of Report stage. I beg to ask leave to withdraw the motion.
 Motion and clause, by leave, withdrawn.

New Clause 5 - Proceedings under Financial Servicesand Markets Act 2000

`.—The service of any notice under section 1 above and the payment of any special contribution under section 2 above, or any decision to not serve any such notice or to not make any such payment shall not form all or part of the subject of any proceedings against any person under the Financial Services and Markets Act 2000.'.—[Mr. Flight.]
 Brought up, and read the First time.

Howard Flight: I beg to move, That the clause be read a Second time.
 The clause raises the issue of market abuse. Again, on Second Reading, I did not communicate the point that I was making clearly enough. 
 The principle behind all the market abuse legislation—the Financial Services and Markets Act 2000 and the nightmarish regulations yet to come—is that the price of shares should not be capable of being distorted upwards or downwards by misleading information. The simple point here is that any company that does not avail itself of the option to pay the special NIC bill sends a clear signal to markets that people will take negatively. Whatever the underlying reasons, the company is clearly saying that it does do not think that the NIC bill that it may have in the future will be bigger than the current one. It is sending a clearly negative signal to markets about the prospects for the share price. 
 As we discussed on Second Reading, there may be different reasons for opting not to make the payment: management may want to change the employees substantially, so many options will lapse, or the company may not be able to afford to pay it, and so on. Although it is not clear precisely what will fall within market abuse and what will not until the regulations are available, it is certainly an abuse for companies to send a wrong signal to investors. If the company says that it will not exercise the option and you, Mr. Benton, have some shares and say, ``I don't like the look of that. I'll sell,'' and the subsequent results are wonderful, you will say that the company misled you.

Stephen Timms: I simply want to ensure that I have understood the hon. Gentleman's point. Is he saying that not taking up the option would send a signal that he is concerned about?

Howard Flight: Absolutely. That is precisely the point: the option is a relieving measure. The Minister referred to the quid pro quo, the key to which here is the fact that the potentially large future employer NIC bills are capped at the much smaller amount as of 7 November. If a company does not take up the option, markets will interpret that as meaning that the management is not optimistic about future prospects. If I were a shareholder in a company and saw that it did not take up the option, I would think of selling the shares. That is how the market will react.
 The reason for not taking up the option may have nothing to do with that and could be for one of two other main reasons. The signals sent to the market could be quite misleading.

John Burnett: Does the hon. Gentleman think that the reverse case could also amount to market abuse? In other words, if a company takes up the option, it sends a signal to the market that it is extremely optimistic. The market might then rely on that.

Howard Flight: The hon. Gentleman is correct in principle, although I, like the Minister, assume that most companies that qualify will take up the option, so it will be the majority rather than the minority. Logically, a company would take up the option only if it were reasonably optimistic about its prospects. If it was pessimistic and thought that profits would decline and that its NIC liability on options would be nothing because the company would not be worth anything, it would be mad to take up the option. The chance of misleading positive signals is much less than the chance of misleading negative signals.

Stephen Timms: I believe that the hon. Gentleman's fears are wholly unfounded. As he said himself, any number of considerations could underlie the decision whether to take the route that is offered by the Bill. He, or any other person, would be ill-advised to conclude that directors will take that decision for one specific reason over any one of the range that might apply. Because they can consider such a wide range of factors, there is no danger along the lines that the hon. Gentleman described. As the business community well knows, early settlement cannot in itself be seen as an indication of directors' expectations regarding the performance of the company's share price.
 However—this is a little like our discussion about the Human Rights Act 1998—let us suppose that the hon. Gentleman is right and that the Bill allows for a breach of the market abuse rules. In such circumstances, the Financial Services Authority would rightly wish to take action. I would therefore argue against the opt-out in the new clause. 
 The new clause is unnecessary, and could damage the authority's ability to carry out its proper regulatory functions. I hope that the hon. Gentleman will withdraw the motion.

Howard Flight: It strikes me that the Minister may not fully appreciate what the Government have done in relation to market abuse. Market abuse may be committed when a person takes an intended or unintended action that affects a share price in the wrong way. The Minister has got the point the wrong way round. For all kinds of good reasons, a company may decide not to take up the option. If that decision sends a signal that markets take to be negative, that is, in principle, an act of market abuse.
 The new clause has raised the issue, and the FSA should perhaps opine on it. It was worth bringing to the Committee's attention our objection to the principle of having companies gamble by publicly taking a view and placing their slots on the board in terms of what might be in a future NIC bill. The Bill could lead companies unintentionally to send misleading share price signals. 
 I have made the point, and I shall be interested to hear what the FSA has to say about it. I beg to ask leave to withdraw the motion. 
 Motion and clause, by leave, withdrawn. 
 Bill, as amended, to be reported. 
 Committee rose at seventeen minutes to One o'clock.